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Archive for the ‘Financial Planning’ Category

Keebler Kills At Roth Conversion Webinar And Proves Some Advisors Are Nuts

Bob Keebler killed at yesterday’s session of the Financial Advisor Webinar Series. Attendees who filled in our post-webinar survey with ratings and comments on the session raved.

Keebler over the past decade has established himself as the premier educator of financial professionals on IRAs.

While he lacks the showmanship of other IRA experts, Keebler is great at making IRA esoterica understandable. He does not try to make things simple but clearly explains the arcane.

Keebler received the highest rating of any speaker since we started the weekly webinar series in October 2008. With five being the best score, attendees gave the webinar overall a 4.7 rating, and that was dragged down ratings on my performance as moderator. Keebler’s rating, without mine factored in, was an astounding 4.8!

In fairness to all of the other presenters that have come before Keebler, advisors are incredibly critical. No matter what we do on these sessions, some attendees complain.

If we go beyond one hour to take questions, some attendees ream me out in the surveys for letting the sessions go long. If we don’t take many questions because we want to end on time, I get an earful from some attendees about that.

Even Keebler, who was obviously great, got some flak for speaking too fast, and several attendees several attendees actually gave him a rating of 1.

What this demonstrates is that some advisors are really nuts. They complain no matter what you do for them.

On the other hand, more than half of the advisors on the session took the time to fill our post-webinar survey and the vast majority gave us great ratings. And the fact that a small handful of advisors found something to give us poor ratings is not all bad. At least they care enough about what we’re doing to express an opinion.

If you’re a member of Advisors4Advisors, you can get CFP Continuing Education by viewing a replay of the session. If you’re not a member, you can view it (with no CE credit) at the Advisor Products webinar page.

I’d ask one favor of you: We have plans to automate the attendee ratings from the post-webinar survey to feed the ratings module in A4A, but we’ve not gotten to it yet. If you’re one of the 1,500 members of the A4A community, please take a minute to go to the Events page on A4A and rate the Keebler webinar and any other sessions you’ve attended.

Below are comments attendees gave us on Keebler’s session, in answering the question, “What could we do to improve the webinar?

  • Good topic and good presentation – thanks!
  • Excellent
  • Excellent! Great info!
  • Excellent
  • The content was excellent, but you should have allowed more time & had Bob speak in more depth about various of the issues
  • Don't change a thing.
  • Very informative
  • Excellent. All excellent material that I can use to communicate with clients
  • Thank you
  • This particular webinar was very helpful. However, in other webinars (last week's) this survey form did not populate at the close. Therefore, in order to receive CE credit, I must call in or email advisors4advisors the following week. This has been frustrating since it has happened multiple times. Improvements here would be much appreciated!
  • Great seminar. The best one I have heard on this topic by far.
  • How to market this concept?
  • Very useful. This will be a bigger topic than many advisors realize this year.
  • Liked it, very helpful
  • I think it is really excellent. Perhaps being ab;e to access the slides as soon as the webinar begins would be great it was hard to keep up at times
  • I thought the webinar was great and there's nothing that comes to mind to improve it.
  • Great webinar, extremely useful, looking forward to receiving the two-pager.
  • Excellent!
  • I thought it was very good and put together well. My only issue is that it went by so fast. I will probably have to listen to it again once you get it online.
  • Great information!
  • Awesome. This helped me raise the bar on evaluating CPA quality!
  • Very in-depth discussion. I think the opportunity to print out the front/back handout in advance of the webinar might have helped. It would have been good to be able to read.
  • Very good…Bob is a little fast in delivery.
  • Absolutely, wonderfully informative.
  • Splendid. No suggestions.
  • Wow! May be the most relevant subject and best speaker possible. Excellent info. I have attended many of your webinars the past year and found this one and the Don Phillips webinar last Feb to be the best. Thanks for making this available.
  • This was one of if not the best webinar I have attended on advisors for advisors.
  • Bob did a great job of answering specific questions. He went well beyond the basics which have been outlined many times. Nice work!
  • Great job
  • Honestly….a little hard to keep up but I'll download the presentation….thanks.
  • You might consider posting the handout, in addition to the slides, prior to the start of the webinar. Overall, time well-spent! Thank you.
  • Every time I listen to a presentation on ROTH conversions I pick up new information
  • It was great, a real eye opener on Roth conversions.
  • Great speaker
  • This was the best ever. Bob Keebler was the sharpest, most knowledgeable presenter you have ever had. My head is still swimming.
  • Have Bob speak again-Great Webinar!!!
  • Very informative
  • Great presentation and useful material. More info on case studies will be handy as I visit with clients down the road.
  • Good topic. thanks.
  • Great Seminar. Thanks Andy!
  • I'm a CPA/PFS and not a CFP. Can I get CPE credit for these webinars?
  • One of the best yet, but too many questions..
  • Excellent, thank you for allowing it to run over for questons.
  • Awesome!
  • Very knowledgeable speaker
  • Difficult to cover it all on this topic. Nice job though.
  • I have heard several presentations on htis issue and this was the best in terms of being understandable and detailed at the same time.
  • It was a great overview of all concepts regarding the topic.
  • I thought it was great. One of the best sessions on ROTHs and conversions I've listened to. Bob is very knowledgeable and I'm sure I'll go listen to the replay when questions hit me in the middle of the night! Thanks again!

Is This New Tool What Life Planning Needs?

Life planning has influenced financial planning enormously over the past decade but it is still in its infancy and not widely embraced by the independent advisory industry. I doubt the new tool I am about to tell you about will change that single-handedly, but it may be a step in the right direction.

While leading financial advisory firms have embraced life planning, the vast majority of financial planners do little or nothing to incorporate the “soft” side of planning in their practices.

For example, George Kinder, a founding father of the life planning movement, and his organization, The Kinder Institute of Life Planning, the leader in the training life planners has trained only about 1,000 of the nation’s 60,000 CFP licensees. Why has this style of planning, which has been embraced by many leaders of the industry, not achieved deeper penetration?

Largely because it takes a significant effort to enter life planning. For instance, Kinder Insitute’s program involves an intense five-day training program and six-month mentorship, which can earn a practitioner a Registered Life Planner designation. Money Quotient, a relative newcomer to training advisors in life planning, offers a three-day training program that incorporates practical tools and processes that can be implemented by its licensees. These programs require a major commitment.

It's difficult to change your business model and invest the time and resources to revamp your practice in even the best of times. Doing so in the wake of the financial crisis is even more difficult.

Now, in a move that is likely to be derided by advisors who have been trained as life planners by one of the established educational programs, let me introduce you to a new life planning solution for advisors who want to dip their toe in life planning without making a huge commitment in time and money.

To read my full article, please join Advisors4Advisors.

Financial Planning Coalition Gets It Right

The Financial Planning Coalition (FPC) released a statement this morning clarifying its position on the Obama Administration regulatory reform proposal.

The FPC applauded the Obama Administration proposal to require a fiduciary standard of care to brokers, repeating a position first articulated in its release of June 18, the day after the Obama Administration’s white paper on regulatory reform was released. However, the FPC now also expressed concern that the fiduciary standard would be “watered down” by the proposal.

The FPC is a recently created group comprised of the Financial Planning Association, National Association of Personal Financial Advisors, and the CFP Board of Standards. Please note that my blog of June 18 swiped at FPC for not mentioning that the fiduciary standard could be watered down by the Obama proposal.

Apart from qualifying its support for the Obama Administration proposal, today’s FPC statement, which I’ve highlighted for quick scanning, clears up an important part of the Obama Administration’s June 17 white paper. The 88-page white paper called for establishment of a Consumer Financial Protection Agency (CFPA) to help protect consumers from bad financial advice. Some observers interpreted this to mean an entirely new regulatory regime would replace the current regulatory framework. Not so.

FPC explained that the CFPA’s jurisdiction “would cover consumer financial products such as credit cards, savings accounts, and mortgages, and possibly insurance, but notably leaving securities transactions and investment advice to the SEC.”

This makes a lot of sense. While coverage in the trade press would have led you to believe that the CFPA was taking over responsibility for regulation and enforcement of advisors, it’s clearly not. Point is, wrangling over regulatory reform is going on behind closed doors and we know little about the structure of what’s to come, much less who the winners and losers will be.

With that qualification, I’ll speculate that our government bodies and existing institutions are likely to be relied on more heavily as reform is implemented. My guess is FINRA will gain power to regulate RIAs advising consumers.

FPC’s effort to prevent the watering down of the fiduciary standard of care for clients is important. If brokers are fiduciaries but can continue to be compensated on commissions, then the fiduciary standard of care has no teeth. And if the U.S. government bans commission compensation of independent financial advisors, as was done last week by Great Britain’s Financial Services Authority, an extremely unlikely reform, then telling the difference between fiduciaries will be difficult.

Clearly, once the fiduciary standard of care is defined under a new regulatory regime, it could be watered down as to be almost meaningless. The reform measures may not make it easier for a consumer to know the difference between an advisor who puts a client’s interest above his own and one who does not.

The FPC’s release today is laudable for pointing this out and for giving advisors tools to speak out. The bottom of the FPC release contains “message points” advisors can borrow to write letters to legislators.

How Will RIA Regulation Change?

As the number of Ponzi schemes and investment frauds prosecuted by the U.S. Securities and Exchange Commission soared in recent months, so did the odds for change in the way small RIAs are regulated.

You don’t have to be a math genius to understand the calculus. In the last six weeks, the SEC issued press releases about prosecuting 18 fraud cases involving registered investment advisers, hedge funds, and Ponzi schemes. During the same period a year ago, the agency brought just six such cases. It prosecuted one such case during the same period in 2007.

Add to these grim statistics the Obama Administration’s vow to clean up Wall Street, massive mistrust in Wall Street, and the announced intention of the SEC chairwoman Mary Schaprio to “harmonize” RIA and broker regulations. The equation logically leads to one solution: RIAs are likely to be regulated by FINRA.

The coalition announced earlier this year of the Financial Planning Association, National Association of Personal Financial Advisors, and Certified Financial Planning Board of Standards is likely too little, too late. The coalition proposes creation of a new regulatory body to regulate financial planners. However, Congress is unlikely to complicate the regulatory framework further by supporting any effort to create yet another regulatory body that is new and has little history of regulating other than the 60,000 or so CFP designees.

I’m not an expert on Washington affairs but a proposal to create a new regulatory body to oversee financial planners would look wasteful, since a statutorily-empowered self-regulatory organization that regulates retail financial advisors already exists. While FINRA’s bureaucracy and history of being dominated by large Wall Street firms is likely to put RIAs in a bad position, it’s hard to imagine any entity other than FINRA taking the reins in regulating RIAs.

So it’s time to start wondering aloud about what it will mean if indeed FINRA becomes the regulator of RIAs. What will the new regulatory regime mean to RIAs and financial planning firms? Here are my guesses:

  • Compliance expenses for RIAs are likely to rise sharply once FINRA is in charge.
  • RIAs will be required to pay some additional fees to FINRA to help defray the cost of a FINRA examination program.
  • Instead of naming a junior-level employee your chief compliance officer (CCO), your CCO may have to pass an exam as is required by FINRA.
  • IA reps will have to pass a competency exam akin to the Series 7.
  • RIAs will be required to submit for review to FINRA client communications touching on certain subjects, such as limited partnerships, recommendations of stocks, mutual funds or derivatives, or that describe your performance history.


What do you think? Let the speculation begin.

Ways RIAs Can Reassure Clients

Five more advisory firm frauds made headlines in the past week. Meanwhile I received two hateful emails about my recent blog posts saying old ways of assuring clients of advisor integrity are no longer enough.

I’m sorry if I stepped on some toes or if you feel I was too harsh with my comments about NAPFA. But unless advisors communicate proactively, candidly, and in detail with clients right now about the trust issue, client assets could start moving away from advisors toward discount brokers.

I’m not predicting a huge stampede. But clients who have seen portfolios slashed in value and who see the string of frauds make headlines need reassurance.

During the last market pullback—the tech bubble of 2001-2002—discount brokers did not have the easy-to-use technology they do today, and only a fraction of the investors used the Internet. It’s different this time. Advisor clients are on the Web and the discount brokers have slick, easy-to-use interfaces.

The history of innovation should make advisors cautious. Disruptive technology systems (discount brokers) are always viewed as crude when introduced. This lulls established market leaders relying on existing technology (traditional financial advice outlets) to believe they will not lose business to the new competitor.

However, incremental improvements in once-crude innovative systems gradually overcome the established regime. This pattern of innovation adoption has been documented extensively.

Advisors would be wise to watch the progress of the major discount brokers in coming months to see how much market share they pick up from the retail flight of assets from Wall Street brokers.

Ironically, advisors are more than ever in need of help from the big discount brokers. After all, these same firms are also the largest providers of custody services to RIA assets. And the custodians can provide advisors with crucial assistance in reassuring their clients of their fidelity and competence.

Perhaps the most important idea an RIA can communicate to assure clients fearful of fraud is that you have an independent custodian. This is a time to emphasize to clients that, unlike Bernard Madoff, you have an independent custodian.

Because of the important role an independent custodian plays in RIA client relationships, I emailed four major custodians a week ago—Fidelity, Pershing, Schwab, and TD Ameritrade. I asked them how RIAs can reassure their clients by emphasizing the role played by a custodian. Only two of the custodians responded.

To me this was surprising. Here’s a chance for the custodians to be on your side and play a valuable role. Your custodial firm can earn its fees by helping you communicate proactively right now. You’d think they would jump at that chance.

Mark Tibergien, who heads Pershing Advisor Solutions, replied within minutes. Brian Stimpfl, a managing director at TD Ameritrade Institutional, responded a day later by spending an hour on the phone with me.

If Fidelity and Schwab contact me after seeing this post and have good ideas to add, I’ll post another entry. Keep in mind, Advisor Products is incorporating these messages into articles we write for RIA client newsletters and websites.

Tibergien says the simple fact that you have a custodian must be communicated to clients. Madoff’s firm was itself custodian of client assets. Almost all custodians mail statements monthly directly to clients. You want to mention to your clients that these statements provide independent verification of their account holdings, transactions, and values.

Stimpfl points out that only about 1,000 of the approximately 11,000 RIAs providing retail investment advice take custody of client assets. You may want to mention to clients that RIAs not holding their assets at custodians require far more due diligence on an ongoing basis.

Clients should understand that portfolio performance reports they get from an RIA can easily be compared against the independent custodian’s statement. This is also a good time to remind clients that custodians will send them notices of trade confirmations whenever a transaction occurs in their accounts. Mentioning that the custodian has its own website where account values are posted 24/7 would also reassure many clients.

You may also want to remind clients of the URL on the custodian’s website where they can sign up to receive the electronic trade confirmations directly from the custodian. Custodians years ago rolled out a feature allowing them to notify your clients of trade confirmations and they can send an email to your clients with the URL where they can download each trade confirmation. They also archive every confirmation for each client. Many clients will appreciate the reminder and your being proactive in disclosing how transparent your business is. It will instill confidence in your firm.

Incidentally, you may want to ask your custodian about its policy on ex-clients. If you move a client’s assets away or if the client fires you and moves to another clearing firm, how long will the custodian keep those old trade confirmations? Stimpfl says they’re archived for seven years at TD Ameritrade.

Stimpfl says several months ago TD Ameritrade produced and distributed a set of materials for RIAs to help them answer questions from nervous investors after the Madoff scandal and market break. The package of materials included a letter that could be copied, pasted, personalized, and mailed out under the RIA’s letterhead.

The letter, Stimpfl says, reminded clients to check their client services agreement with their RIA firm to see exactly what their advisory firm can do with their money. Reminding clients that you have discretion to trade their accounts and how carefully you manage that responsibility would be reassuring. While the majority of RIAs do have discretion of their client accounts, those that do not may want to remind their clients of this fact.

“We live in a transparent society,” says Stimpfl. “And if you're holding back anything, you could unintentionally and unnecessarily put client relationships at risk.”

RIAs who invest in alternative investments should be proactive in communicating about the value of those assets. Advisors who recommend alternative investments should have Investment Policy Statements for each client who holds them. Reminding these clients of the details about holding alternative investments would be wise. Advisors who do not hold alternatives or who hold less than 5% of total client assets in them should consider reminding clients of these facts.

Tibergien says clients should be told about processes and protocols your firm has in place to review investment decisions. If your firm has conducted a “mock SEC audit,” showing clients a report from your compliance consulting firm would be another way to demonstrate your commitment to run your firm with integrity.

You can also remind clients that your custodian has its own responsibilities under the law to ensure client assets are protected. SIPC insurance covers investors in the event of the insolvency of the custodian for up to $500,000 of losses. In addition, a custodian is likely to have separate insurance coverage purchased privately. One custodian has coverage for losses in securities accounts of up $149.5 million and up to $900,000 in cash accounts.

And speaking of cash accounts, Stimpfl says TD Ameritrade has safeguards in place that prevent an RIA from moving cash from a client’s account into the firm account. RIAs can move cash from a client’s account to another account held by the same client, but TD Ameritrade must receive written approval via mail. Similarly, client address changes must be verified via mail.

Finally, both Pershing and TD Ameritrade said they have automated systems in place to monitor RIA client accounts. Software to ensure compliance with anti-money laundering laws and programmatically search for suspicious trading patterns in customer accounts are yet another protection for RIA clients.

By the way, the two hateful emails I received were more than offset by two uplifting messages. I appreciate the kindness and support.

One More Thing:

If you are interested receiving notification of the continuing drumbeat of advisor frauds being uncovered almost daily, I’ve been “tweeting” the headlines about them. Follow me on Twitter to receive these notifications. Here’s the recent crop of those tweets:

· SEC Obtains Asset Freeze of Florida-Based Investment Adviser Defrauding Investors http://bit.ly/oVNXR
· SEC Charges Connecticut-Based Hedge Fund in Multi-Million Dollar Fraud http://bit.ly/6T3ju
· Hennessee Group, A High-Profile Hedge Fund Research Group, Just Charged by SEC with Failing To Do Proper Due Diligence http://bit.ly/j53yh
· SEC Halts Multi-Million Dollar Fraud Conducted by Philadelphia-Area Investment Adviser http://bit.ly/BaVZx
· One-Time Quarterback for Football's NY Giants Confesses to Defrauding Investors @ http://bit.ly/178N3r

NAPFA Stained By Scandal

It was only a matter of time before NAPFA’s reputation would be tainted in the national media.

Ron Lieber, the personal finance columnist at The New York Times, wrote a story in today’s paper entitled, “How a Personal Finance Columnist Got Caught Up in Fraud.”

Lieber last week received a letter from his advisory firm's custodian, Charles Schwab & Company, saying it “had discovered unauthorized money transfers out of accounts associated with the financial planning firm I use.”

Ironically, Lieber hired advisor Matthew Weitzman of AFW Wealth Advisors after writing a “secret shopper” article about how to pick a financial advisor, which was published by in May 2003 by his former employer, The Wall Street Journal.

A day after receiving the letter from Schwab, Jay Furst, who co-founded AFW with Weitzman, sent an email message to Lieber.

“Matthew Weitzman , one of our partners, has been placed on leave from AFW,” Furst said in the letter emailed to Lieber. “As part of this leave, Mr. Weitzman will have no further contact with any client accounts. We do not anticipate that Mr. Weitzman will be returning to AFW in any capacity.

“We believe that the affected accounts have already been identified and that the total amount of the discrepancy is less than 5% of the total assets under management at the firm,” Furst added. “However, it is possible that additional accounts may be identified during the investigation and that the current estimation may change as a result of the investigation.”

The letter from Furst left little doubt that he blames Weitzman for the wrongdoing. Furst said be notified the Securities And Exchange Commission and that the agency is investgating the matter.

“AFW views these potentially unauthorized transactions as the isolated acts of Mr. Weitzman,” AFW told Lieber in a prepared statement when he asked for the firm to comment. “AFW, its many clients and I are saddened, angered and betrayed by the apparent actions of Mr. Weitzman, Mr. Furst reportedly added. “AFW is sorry for any harm this has caused to its clients.”

And then Lieber brands NAPFA with the black mark that very publicly stains its once unblemished record with the consumer press.

“Mr. Weitzman and Mr. Furst belong to the National Association of Personal Financial Advisors, an organization of financial planners who have sworn off commissions and make money only through fees they charge their clients,” Lieber writes. “Members have made a lot of noise in recent years about ethics and the importance of acting as a fiduciary, in a client’s best interests.”

“I’ve always believed that advisers in the association were plenty smart and morally upright, but it’s hard to recommend them now without at least including an asterisk.”

The consumer press has been infatuated with NAPFA for far too long and it was only a matter of time before one of the group’s members strayed from the lofty principles embraced by the association.

NAPFA members are generally better-trained than the average advisor, and the group has a history of backing ethical practices. But the fee-only compensation model that once differentiated NAPFA members from other advisors has been co-opted by planners who do not practice excellence or are outright unethical. Mode of compensation stopped being an accurate litmus test for professional competence over a decade ago. The consumer press just didn’t know it!

Ron Lieber shouldn’t feel betrayed by NAPFA. He and the rest of the consumer press should have been telling consumers years ago about ways to ensure an advisor is honest. Instead the financial press lazily used the NAPFA membership directory to find the same sources in article after article year after year.

Lieber is now telling readers to read their statements carefully, as if consumers are actually going to do that. He’s a personal finance reporter and didn't detect a problem!

Smart consumers and the consumer press finally have figured out that joining a membership association and networking with ethical financial advisors is no guarantee of integrity and competence.

NAPFA remains a powerful and positive force in the financial advice business. But it needs to reinvent itself and rethink. The same old ideas that used to work are no longer good enough to keep NAPFA in the warm embrace of the press and consumers.

The best way for advisory firms to fight the rising tide of consumer mistrust is by embracing transparency systematically. Transparency must be integrated in an advisory firm’s technology platform and system for client communications.

Making Sense (And Dollars) After The Plunge

“If you go to a doctor because your elbow hurts, the doctor isn’t going to treat you heart or hand,” says Craig Israelsen. “He’ll treat your elbow. That’s what advisors need to do with clients now.”

“It’s not like a client’s entire portfolio is hurt,” says Israelsen. “It’s just part of it.”

Israelsen, an associate professor at Brigham Young University and frequent contributor to Financial Planning Magazine, likens the market crash of 2008 to a client’s elbow that's taken a very unfunny blow to the funny-bone.

Israelsen will speak about how the market cataclysm affects rebalancing at this Friday’s 4 p.m. EDT session of the Financial Crisis Webinar Series.

Israelsen says that advisors who did not have retiree or pre-retirees holding age-appropriate cash positions before the global economic crisis decimated stock prices are vulnerable but have no one but themselves to blame. He has always argued that it was misguided to think of cash as being a drag on portfolios. “No one thinks cash is a drag now!”

Prudent advisors did have retirees and clients over age 55 in a portfolio with a reasonable amount of cash. For retirees, this is the time to draw down on cash. And it is also a time to focus on the performance of their cash position, that is, to focus on what worked in 2008.

“They should be pulling their retirement income from their cash positions,” says Israelsen, who offers advisors a subscription to his research for $350 a year. “That’s what the cash is there for. It’s a pantry.”

“Leave the equity positions alone for now,” he says. “They will come back.”

In client communications right now, advisors should be focusing on the part of their portfolios that have been bullet-proof, says Israelsen, a 50-year old tri-athlete and father of seven. By focusing on what has been working, you make it easier for clients to sit tight and wait for stocks and stock mutual funds to rebound.

“The entire portfolio you manage for a client may show a negative return,” says Israelsen. “But you don’t need to liquidate the entire portfolio. You only need to be sure the client has money for living expenses now, and that is what the cash is for.” Cash is there for a rainy day, and it has been pouring.

Israelsen’s research has long focused on broad diversification. His 7Twelve portfolios use seven asset classes and invest in 12 underlying mutual funds or ETFs. The portfolio is designed to be used as a core position within virtually any portfolio.

While many advisors think of the Standard & Poor’s 500, or perhaps an ETF or fund investing in the total stock market, as their core portfolio position, Israelsen says the core position of a portfolio should be a widely diversified bundle of asset classes.

The core of Israelsen’s 7Twelve portfolio is comprised of equal-weighted positions including real estate, natural resources, commodities and bonds as well as of large-, small, and mid-cap stocks and several other asset classes, including cash.

Using the 7Twelve portfolio as the core holding in a balanced 60/40 portfolio makes sense. For example, a 60% position in the 7Twelve portfolio combined with a 40% position in the Vanguard Total Bond Index lost 12.8% in 2008, but had a 6.6% 10-year annualized return between 1999 and 2008. Alternatively, a 60% position in the Vanguard Total Stock Index combined with a 40% position in the Vanguard Total Bond Index lost 20.2% in 2008 and had a 2.4% 10-year annualized return as of 12/31/08.

Custodian Succeeding With Small RIAs

Amid the gloomy landscape stands an oasis: Shareholder Services Group.

About a year after Peter Mangan left TD Waterhouse Institutional in 2002, he along with Barry Boyte and a few other veterans of the RIA custody business started Shareholder Services Group (SSG). (See my April 2003 article.)

Initially, I had my doubts. Could a custodian focusing on small advisors compete? It was the middle of a bear market, and the established custodians were still struggling in the aftermath of 9/11. I feared they'd fall flat on their faces. Boy was I wrong.

SSG is now a custodian to 480 RIA firms and it is experiencing a boom amid the economic bust. While the $1.7 billion amount of assets SSG custodies for RIAs is dwarfed by the big-name custodians—Fidelity, Pershing, Schwab, and TD Ameritrade, SSG has built a profitable business around smaller RIAs that the larger custodians don’t value as much.

According to Boyte, since the market meltdown about 15 to 20 new RIA firms have been signing on with SSG each month.

About 75% of the new RIAs are registered reps coming from BDs, Boyte says, and the vast majority are dropping their securities licenses. With a new regulatory regime likely (see previous post), these registered reps seem anxious to move to a fee-only or fee-based business-model now rather than wait.

These advisors are probably moving now because they have less to lose. The stock market meltdown has eroded the value of their 12b-1 fees, making it easier to walk away from them.

Other custodians are saying they’re seeing an influx of new assets, too, but the details of SSG’s growth tell a compelling story.

“It’s a good business model,” says Boyte. “Peter Mangan laid it out in a business plan in 2002 and we’ve adhered to it very closely because it works. First and foremost, it’s about giving good quality service.”

How is SSG succeeding? Nothing fancy, no unbelievable tech story, no huge discounts. Just good service.

Boyte says SSG pricing is competitive versus other custodians, but what separates the firm is the deep experience of its principals and staff, and SSG’s sole focus the RIA custody business. In contrast, Fidelity, Schwab, TD Ameritrade, and Pershing are financial services behemoths with an RIA division.

Boyte says the firm is not trying to bring in more advisors because it fears service issues. SSG, he says, is able to maintain a high service level because it only hired personnel experienced in working with RIAs. “Everyone on staff here now worked with us at Jack White and TD Waterhouse,” says Boyte. “When we need a new person, we know where to go and who to speak to.”

Any advisor who is discouraged because of tough business conditions should take comfort from SSG’s story. If you’re smart enough to stay focused on your business model and on doing the right thing for people in this business, you, too, will probably be doing back-flips in a few years.

Schapiro: “Harmonize” RIA And B/D Obligations

Testifying before the Senate Committee on Banking, Housing And Urban Affairs Thursday, SEC Chairman Mary Schapiro submitted documents saying the agency anticipates “harmonizing investment adviser/broker dealer obligations.”

“We are studying whether to recommend legislation to break down the statutory barriers that require a different regulatory regime for investment advisers and broker-dealers, even though the services they provide often are virtually identical from the investor's perspective,” Schapiro said in prepared testimony. “Some of our rules regulating financial intermediaries need to be modernized, and the Commission is considering what, if any, legislation to ask for from the Committee.”

Along with her prepared remarks addressing the SEC’s priorities and possible reforms for restoring investor confidence, Schapiro submitted an appendix to her testimony to provide “an overview of the major functions of the SEC, a summary of recent activity, and the resources allocated to each function.” The document says that “anticipated 2009 activities” of the SEC’s Division of Investment Management and Division of Trading And Markets, which regulate RIAs and B/Ds respectively, included “harmonizing investment adviser/broker dealer obligations.”

In 2008, according to the appendix submitted by Shapiro, the SEC, using risk-based targeting, conducted examinations of 1,521 investment advisors (14% of registered universe of 11,300 registered investment advisors). During the same period, the agency conducted examinations of 720 broker/dealer firms (together with FINRA, 55% of universe of 5,500 registered broker/dealers examined).

Schapiro, who served as CEO of Financial Industry Regulatory Authority, the self-regulatory organization for broker/dealers, was appointed by President Barack Obama on January 20 and was confirmed unanimously by the Senate and sworn in as SEC chairman on January 27, becoming the first woman to serve in the post.

With her strong ties to FINRA, many RIAs have speculated that Schapiro would act to bring regulation of RIAs into alignment with brokers, a development most RIAs do not welcome and most B/Ds cheer. RIAs managing more than $25 million are regulated by the SEC while those with less than $25 million under management are regulated by state securities bureaus. Brokers are licensed by FINRA and supervised by broker/dealers.

Compliance regimes imposed by most B/Ds on registered reps are generally far more invasive and bureaucratic than the compliance system faced by RIAs. However, B/Ds have a long history of violating rules governing sales to retail investors, while instances of abuses by RIAs been comparatively rare.

The $65 billion Ponzi scheme by Bernard Madoff has created an environment in which investors and legislators are demanding change to the regulatory framework, which is widely considered to have been outmoded in recent years by the growing use of complex derivatives, unregistered hedge funds, and private equity partnerships, and the conflicts of interests at credit rating agencies responsible for passing judgment on debt issues that pay huge fees to the rating giants. In her prepared remarks, Schapiro’s promised to address a number of these issues.

While Schapiro offered no details about how she might bring BD and RIA regulation into closer alignment, her remarks make it clear that a review of the regulatory framework faced by RIAs is high on her list of priorities for 2009. An area affecting RIAs that she offered some details about are instances in which an RIA takes custody of assets. While few RIAs accept custody of client assets, the Madoff fraud would likely have been discovered sooner if stricter rules had been in effect governing instances in which RIAs take custody of client assets.

“I have asked the staff to prepare a proposal for Commission consideration that would require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets,” Schapiro said. “I also expect the staff to recommend proposing a rule that would require certain advisers to have third-party compliance audits to review their compliance with the law. And to ensure that all broker-dealers and investment advisers with custody of investor funds carefully review controls for the safekeeping of those assets, I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets.”

Schapiro said the list of certifying firms would be publicly available on the SEC's website so that investors can check on their own financial intermediary. In addition, the name of any auditor of the firm would be listed, which would provide both investors and regulators with information to then evaluate the auditors.

Six Marketing Ideas From A Guru

I recently called marketing genius, Harry Beckwith, to find out what he thinks advisors should be doing to respond to the terrible market drubbing.

Beckwith has authored several marketing classics, including “Selling The Invisible,” “The Invisible Touch,“ and “What Clients Love.” I’ve interviewed Beckwith before and he can be depended upon for common sense fundamentals. While brilliant, he admits that there are no cure-alls, no panaceas, no instant answers to succeeding in these tough times. But he does have sound advice for coping with the economic maelstrom.

1. Tell Your Story. Send clients articles written by third-party sources that explain there is no escaping the damage to your portfolio. “Take the opportunity to educate clients so they know there just has not been a safe asset class,” says Beckwith. “It’s all been battered.”

2. Publish. This is an important time to reinforce your status as an expert with clients. Write an article about the financial crisis for a trade publication, local business publication, or the local newspaper. Then distribute the clip to clients. Sure, you’re not a professional writer. But if you can get one article published every few months, It will enhance your credibility. Beckwith and I both agree that books by William Zinsser are the best primers written on writing. He suggests “Writing To Learn.” Beckwith also recommends contacting the local journalism school to find a student who can write articles for you.

3. Note This. Beckwith says sending a personal note to clients is a smart touch. If you’re mailing statements, articles, or newsletters to client, attach a handwritten note. Adding personal touches to client communications now is important.

4. Never Eat Lunch Alone. “This is a business where you need to be face to face with people,” says Beckwith, invoking the title of a successful book. “Ultimately, people are buying you.”

5. Set Expectations. Clients don’t expect you to pull off unnatural feats. “As long as you set realistic expectations about what you can do, people will be satisfied,” says Beckwith. Don’t promise too much. But deliver what you say you will.

6. Seize The Moment. Independent advisors are in an unusually strong position to capitalize on the crisis. “The biggest brands in financial services have been sullied,” says Beckwith. To take advantage of your competitive strengths, Beckwith says advisors must emphasize the personal nature of their relationships and their personal service.

Beckwith says he remains optimistic despite all the bad economic and financial news. “This is a historic confluence of unique factors that will require more work to dig out of,” says Beckwith. “We got out of Hooverville and we’ll get out of this."

Beckwith’s most recent book, "You, Inc.", was published in 2007. He is now writing his fifth book, which is about positioning and due for release in 18 months.

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